Pinewood Property Ltd. is expected to have an operating profit of 1.5m this year. The company operations are financed through a mixture of bonds and ordinary shares. The bonds were issued five years ago at a par value of 100 (total funds raised 5m). They carry an annual coupon of 8%, are due to be redeemed in four years, and are currently trading at 110. The cost of debt capital before tax is 5.17%.

The company's shares have a market value of 4m, the return on risk-free government securities is 8 percent and the risk premium for an average-risk has been 5 percent. The company's shares have a lower-than-average risk and its historic beta as measured by the co-moment of its shares and the market index correctly reflects the risk adjustment necessary to the average risk premium, being 0.85. The corporate tax rate is 30 percent and the firm has net assets of 3.5m reported in its balance sheet.

a. Calculate the cost of equity capital.

b. Calculate the weighted average cost of capital.